What does a 1031 exchange company actually do?
A 1031 exchange company — a qualified intermediary, or QI — is the neutral party that stands between your sale and your purchase. You cannot take possession of the proceeds from your relinquished property; if you do, the sale is taxable. The QI holds the funds instead and makes the exchange mechanically valid. Its core jobs:
- Prepare the exchange agreement and assignment documents before your sale closes.
- Receive and safeguard the sale proceeds so you never have actual or constructive receipt.
- Receive your signed 45-day identification of replacement properties.
- Coordinate with escrow and title on both the sale and the purchase.
- Wire funds to the replacement closing and provide the records your CPA needs to report the exchange.
What a QI does not do: give tax advice, find property, or negotiate. Those belong to your CPA and your buyer's representative.
Why does choosing the right exchange company matter so much?
Because the industry has no federal licensing, and only a handful of states regulate it. Anyone can call themselves a 1031 exchange company. When a QI fails, the money it holds is the exchanger's money — and exchange failures are not hypothetical: the 2007 collapse of the 1031 Tax Group (whose owner was later convicted of fraud) and the 2008 bankruptcy of LandAmerica's exchange subsidiary left exchangers fighting for proceeds that were supposed to be safe. Working with a weak facilitator can also mean procedural errors that disqualify the exchange, missed deadlines, or documentation that does not hold up at filing time. Treat the choice like choosing an attorney, not like choosing a title clerk.
How do you vet a 1031 exchange company's fund security?
Where will my money sit?
Ask for the account structure in writing. You want proceeds in a segregated qualified escrow or qualified trust account — ideally titled for your exchange — at an established bank, not pooled in a general operating account alongside other clients' money.
Who can move it?
Dual controls: no wire leaves the account without two authorized signatures, and ideally your written consent on each disbursement. Ask how the company verifies wire instructions; wire fraud aimed at closings is a live risk.
What protects me if something goes wrong?
Ask for current certificates of fidelity bond and errors-and-omissions insurance, and compare the coverage to the size of your sale. A reputable firm sends these without hesitation.
How do 1031 exchange company fees compare?
Fee structures vary: a setup or document fee, sometimes a per-property or holding charge, and higher pricing for reverse and improvement exchanges. Request a written schedule that lists everything — additional replacement properties, wires, identification changes, and early-release requests — so nothing surprises you at closing. Exchange fees are small relative to the tax being deferred, which is exactly why the cheapest quote should never be the deciding factor. See reverse and partial structures for when a more complex exchange is worth its extra cost.
How do you choose a 1031 exchange company, step by step?
- Define the exchange. Standard delayed, reverse, improvement, multi-property, or partial — the structure decides which companies are qualified to run it.
- Shortlist two or three firms. Use referrals from your CPA or attorney and the FEA member directory, and check how long each firm has run exchanges.
- Verify security. Account structure, dual controls, bond and E&O certificates — in writing.
- Compare scope and fees. Line by line, including the charges for complex structures and extra properties.
- Interview the exchange officer. Who answers the phone on day 44? How quickly do they turn documents?
- Check history. Search for complaints, litigation, and state regulatory actions before you sign.
What questions should you ask before hiring a 1031 exchange company?
- How long have you facilitated exchanges, and how many do you handle a year?
- Are client funds held in segregated accounts? At which bank? Who can authorize a wire?
- What fidelity bond and E&O coverage do you carry? Can I see the certificates?
- Who is my named exchange officer, and who covers when they are out?
- Do you handle reverse, improvement, and multi-property exchanges in-house?
- How do you calendar and remind me of the 45- and 180-day deadlines?
- What is your full fee schedule, and what does it include?
- Can you provide references from exchangers with deals like mine?
What are the red flags in a 1031 exchange company?
- Vague or evasive answers about where and how funds are held.
- No proof of bonding or insurance, or coverage far below your sale size.
- Pitching what your held proceeds will earn instead of how they are protected.
- A single person controlling disbursements.
- Slow, unclear communication before you have even signed.
- An intermediary who is also your agent, attorney, or accountant — a disqualified person.
Who else belongs on your 1031 exchange team?
The QI is one seat at the table. Your CPA confirms eligibility and handles reporting; your attorney reviews contracts and the exchange documents; and your buyer's representative finds and closes the replacement property inside the clock. Most exchanges fail on the calendar and the identification list, not on the paperwork — which is why the replacement search should start before your sale closes. Run your dates through the 1031 deadline calculator and browse 1031 exchange properties for sale to see what a realistic identification list looks like.